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How Does Residency Impact Your State Tax Return?

by
Steward Financial
on
8/17/2020
How Does Residency Impact Your State Tax Return?

When you file your state tax return, most of the time, the process for determining your state of residence is typically straightforward. In most cases, employees work and live in the same state and so their state of residency for tax purposes is the same as their home address. 

But what happens if you live in another state on a temporary basis or if you have multiple residences in various states? 

Let’s take a look at what it means to establish residency for tax purposes.

What is Tax Domicile?

Once you have established tax residency in a particular state, that state has the right to tax you on your income earned no matter where it is earned. This includes intangible income such as interest and dividends earned on any investments that you might have. 

If you earn income in multiple jurisdictions, you are typically allowed to take a credit for taxes paid in the other jurisdictions on your resident state tax return.

While you may think that simply working or having a second home in another state might not be an issue, it is important to understand the rules in order to not inadvertently generate domicile.

For example, the state of New York is notoriously strict when it comes to matters of establishing tax domicile. According to New York law, you are considered a resident for tax purposes if you spend more than 183 days in the state and maintain a permanent residence for more than 11 months (please note this does not have to be your primary residence). Any portion of a day is considered a day for purposes of determining tax domicile.

In the case of Nelson Obus in the state of New York, Mr. Obus was determined to be a New York resident for tax purposes. Mr. Obus is a New Jersey resident who works in Manhattan. In addition, he also owns a home in New York State, which included a small apartment attached to the home, which he rented for $200 a month. The main home was used by Mr. Obus for vacation throughout the year, though he never spent more than 21 days at the residence. The residence was more than 200 miles from where Mr. Obus worked in New York City.

The New York state department determined that because Mr. Obus spent more than 183 days in the state and maintained a permanent residence, he was a statutory tax resident of the state of New York.

The argument that the home was more than 200 miles from where Mr. Obus worked and the small apartment was rented could not be used since the main home, which was a five-bedroom house, was available to Mr. Obus at any time.

This means that Mr. Obus is both a resident of New Jersey and New York for tax purposes. This would result in income such as interest, dividends, and capital gains being taxed in both jurisdictions.

Given the current global pandemic, more people than ever are now working from some place other than their offices. This may mean that you are currently living somewhere other than your state of residence. You will want to keep careful records of your time spent in each jurisdiction to determine whether any additional filing requirements have been triggered.

As you can see, if you work and/or maintain a home in multiple jurisdictions, it is important to understand the rules in order to avoid surprises when tax time comes.

How Do I Establish Tax Domicile?

Establishing connections to your new state is crucial when it comes to proving tax residency. Some of the things that can be used to establish tax residency include:

  1. Establishing a residence in your new home and terminating the lease, selling, or renting your property to an unrelated third party.
  2. Obtaining a drivers’ license in your new state and registering to vote
  3. Registering any cars or other vehicles in your new state
  4. Register children for school in the new state
  5. Create bank accounts in your new state of residence
  6. Have all important documents such as wills, insurance policies, and financial documents sent to your new home.
  7. At tax time, file a resident state tax return, if required in your new state.

The more ways you can disconnect yourself from your old state of residence, the less likely you are to run into issues in the future.

Knowing whether you have properly established tax residency in one state versus another can be complicated, especially if you maintain homes or work in multiple states. The rules are different for each state, so working with a tax advisor can help you understand how state tax law might impact your unique situation.

If you have any questions regarding tax residency, please contact your tax professional.

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Steward Financial

Steward Financial

Jon Osborn is a tax preparer based in San Dimas, California. His company, Steward Financial Services, offers a broad range of tax preparation, accounting and business consulting for small businesses. He loves to work with clients who are looking for answers to complex tax and business planning issues. He has owned several small businesses and worked with over one hundred small business owners. He helps his individual and business tax clients find the best ways to spend their money in order to minimize IRS tax. Small businesses looking to grow, sell or just increase cash flow are one of Jon's specialties.

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